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LGT Vestra US

CIO Question Time – Italian banking and oil - Dec 2016

Jonathan Marriott – Chief Investment Officer, LGT Vestra LLP

Should we be worried about the Italian banking sector?

Throughout the year, Italian banks have been weighing on the Eurozone banking sector. Italy is one of the most overbanked countries in the world, with more banks per people than hotels or schools according to the IMF. Considering onerous bankruptcy laws, the Italian banks have a large proportion of nonperforming loans on their balance sheets. This has hampered them from further profitable lending. One of the oldest banks in the world, Monte dei Paschi di Siena, is one of the most troubled and has seen its shares plunge in recent years. Other Italian lenders have experienced similar fates.

The situation is further complicated by the upcoming Italian referendum on constitutional reform, which is being framed as another vote of confidence in the EU. Prime Minister Matteo Renzi has stated that he will resign if the referendum doesn’t pass and this would worsen the situation for the banks. This is because Renzi has stated he will ease the burden for banks to consolidate and simplify the bankruptcy proceedings. Polls currently predict the referendum will be rejected but we are cautious of relying too much on these surveys in light of recent events. The number of undecided voters remains high and so the referendum result hangs in the balance. We will be watching closely on Sunday to see the outcome and its implications for both the Italian banks and the Eurozone as a whole. Considering the underlying situation in Italy and the upcoming contentious referendum, there are genuine reasons to be concerned. Having said that, European banks have taken substantial steps since the 2012 crisis to boost capital levels so a wider contagion from the Italian banks to the Eurozone banking system seems less probable.

What does the future hold for the oil price post presidential election result, assuming Trump’s protectionist policies come through?

At this week’s OPEC meeting, the members agreed to cut supply for the first time in 8 years. In the past, oil-producing countries had sacrificed oil prices in order to preserve their market share despite increased competitive pressures. This stance saw the price of oil fall from over $100 a barrel in 2014 to around $45 a barrel over recent months. The immediate market reaction to the deal was an 8% rally in oil prices as oversupply is likely to be stemmed in the short run. However, question marks remain about other participants in the oil market. Nowadays, OPEC isn’t the dominant force it once was and now contributes around 40% of supply. The US, with its shale production, and Russia have gained more prominence in the industry in recent years.

We wouldn’t read too much into the current rally considering the comments made by President-Elect Trump. He has stated a desire to bring more manufacturing back to the US and is less concerned about climate change which could see oil production rise. Shale oil production in the US has surged over recent years and a higher oil price resulting from the OPEC deal could see US production rise. If Trump successfully implements measures to boost domestic production, this could stifle the outlook for the oil price in the medium run.

 

 

 

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